People want to own that debt. Banks, building societies, pension funds, life assurance companies, foreign governments, individuals even, all appreciate owning this debt because it’s the safest form of saving available in the UK in sterling. UK debt’s great stuff that people want.
OK, cool.
Stage 1 QE started in 2009 and was last used in 2016. It created £445bn of new money. That was used to buy £435bn of government bonds, or gilts, and £10bn of corporate bonds, which we can ignore. There were three goals to first stage QE.
The first was to keep interest rates down. The Bank of England calls QE monetary policy for a reason. Buying gilts in the financial markets pushes up their price. And since the return paid on them is fixed if their price goes up the effective interest rate paid on them goes down.
So, err, people don’t want quite as many gilts as the Bank wants to issue then? That’s why they have to buy them to lower interest rates?
Then there’s the biggie here.
Snippa spends a long time telling us that QE! and QE2 haven’t bled into the real economy. They’ve just been spent on increasing reserves at the central bank and had the effect of raising asset prices. There is no real economy – other than asset – price inflation as a result. Well, maybe.
So, therefore:
What should the government do? Stage 3 QE is my answer. This is quite different to stages 1 and 2. In stages 1 and 2 there’s no direct link between government spending and QE. It’s indirect. Spend creates the deficit, requiring bonds to clear it, which requires QE to cancel them.
In Stage 3 QE the link to spending is explicit. In this stage the government plans economic recovery. Call it a Green New Deal. A Green or National Investment Bank funds this programme. It issues bonds to pay for the investment. The Bank of England uses QE to but those bonds.
Now QE is explicitly created in advance to fund spending.
So if we do something completely different, create money to go spend in the real economy, the result will be the same – no inflation.
That might not be quite the way it works out really.
“Snippa spends a long time telling us that QE! and QE2 haven’t bled into the real economy.”
How the f*ck does that work then? What exactly did the government do with all the money it ‘borrowed’ from the BoE (who printed it of course)? Stick it in a big box and get it out at weekends to gloat over? Of course it didn’t, it spent it into the real economy, on benefits, salaries, goods and services it would otherwise not have been able to afford. Yes there was the corresponding ‘benefit’ that the whole process depressed interest rates as well, but that wasn’t the real purpose, that was to allow the government to continue spending like a drunken sailor on printed money, when borrowing the same amount from the private sector without QE would have resulted in a funding crisis pretty sharpish. Lowering interest rates was just a happy side effect.
This is stump thinking at its best. All that is missing is how increased taxation fits into the mix. Hasn’t he noticed that house prices have increased massively over the last 10 years? OK, that’s 2 things he’s missed.
‘all appreciate owning this debt because it’s the safest form of saving available in the UK in sterling. UK debt’s great stuff that people want.’
Perfidious Albion.
UK’s political leaders are strongly pushing the electrification of the country. To save the planet.
UK’s political leaders are strongly pushing the destruction of power generation in the country. To save the planet.
Any UK debt with a period of over 10 years is JUNK.
Sh Gamecock, don’t tell everyone
But there is a lot of index linked stuff out there… Don’t you know Gamecock?
Is it though? Is not a safer form just to, you know, own Sterling. Or actual sterling? How much value has been inflated away from a Pound in the last 20 years compared to owning a Pound’s worth of silver?